Really Nominal

Nominal:(of a price, consideration, etc.) named as a mere matter of form, being trifling in comparison with the actual value;minimal.

The now rarely heard from Alliance Bernstein Economist Joe Carson, who I had the luxury of working with at Dean Witter (whatever happened to Reynolds?), taught me a simple parlor trick to amuse your sotted party guests. At, or near equilibrium the nominal 5 year note yield should approximate the real GDP print. One could always weigh in at the neighborhood pot-luck with cheerful (or morbid) economy calls knowing just the yield on "The Cinco." This knowledge became the basis for my Fed Funds equilibrium model years later. By having a calibration of "equilibrium" one can judge prevailing market observations to the standard and trade accordingly.

The data today show the distortion in term structure to economic growth to be severe. The 1.4% GDP figure is now tracking the 10 year Government Note. This distortion has consequences beyond red faced rants about fiscal cliffs and quantitative easing voodoo. The new alignment- if it holds (more on that in a minute) suggests time, over 1800 days of time, is no longer relevant in economic decision making. By breaking the decade into forward segments and valuing them as zero coupons (that's called a Eurodollar futures strip btw) we can see the entrenching malaise. 5 year 5 year forwards, or tips also support this view. At 99.40+ the "green pack" has an implied yield just behind the 5 year at 59bps.

So, either the old metric shines through and we can look forward to a significant reduction in the GDP report, or the new "Long Malaise Metric" points to a lost half-decade. Now, tell me again why more should not be done?

8 thoughts on “Really Nominal

    1. kevin Post author

      print, default, recognize losses –move aggregates are stalling-EZ let them fall>>remember all those depression mistakes we’d never make again? making them…thanks for stopping by the site

  1. shrek

    The country has no credible plan to ever reduce its national debt. Clearly we are caught in a cycle of debt and debasement that will go on until the naty consequenceds show up. the treasury and fed are hand in hand. that why they should stop right now

    1. kevin Post author

      if the budget balanced tmro we’d still have the debt , right? I never bought the too much debt story, there are plenty of American assets on the other side of the ledger and plenty of derivatives to play with that help…print, default, recognize losses and move on

  2. lwmaus

    A very teachable bit of content here. Thank you for it.

    I have a couple of questions:

    (1) Aren’t we on the template of the Japan experience post 1989 (the decades of slow or no growth) ?

    (2) If yes, then how do we get off that template (what steps would u recommend and by whom) ? If no, then where the heck are we and who has the ball ?

    1. kevin Post author

      culturally Americans won’t/shouldn’t stand for Japan experience…may not be lifetime but low unemployment over there perpetuates lost 2x decade. The Reaganites are wrong cuz there was massive pent up demand for goodsANDcredit that’s not there now..print, default, recognize losses, move VietNam, it ends when we ALL agree it must end.


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